Oil market recovery remains on track but fragile, says Scotiabank

The Scotiabank Commodity Price Index gained 2.2 per cent month over month in February; the bank says oil prices in 2017 will be affected by OPEC and non-OPEC country production cuts, as well as U.S. shale recovery

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TORONTO—The Scotiabank Commodity Price Index gained 2.2 per cent month over month in February as industrial commodities continue to benefit from healthy demand, and according to the bank, the oil market’s recovery remains on track but fragile.

Scotiabank says OPEC news will continue to drive near-term market sentiment, especially ahead of the trade group’s May. 25 meeting to decide whether or not to maintain production cuts for another six months.

“We’re now in the third month of OPEC production cuts and compliance within the OPEC-11 has been surprisingly strong. We believe that the combination of high OECD inventories, still-weak upstream investment outside the U.S. and recent oil price weakness will prompt OPEC to extend their production cap through the end of the year,” said Rory Johnston, commodity economist at Scotiabank.

Prices for the North American crude oil benchmark West Texas Intermediate have been downgraded and are now forecast to average $53 per barrel in 2017 and $56 per barrel in 2018.

Scotiabank says the four key trends that will shape the oil market for the remainder of 2017 are OPEC output discipline; the pace of the U.S. shale response; non-OPEC production declines outside the continental U.S.; and the strength of consistently-underestimated global demand growth.

The bank also says that non-OPEC oil producing countries will be essential to meet future supply needs, as they are nearly equal to OPEC in size.

U.S. shale continues strong rebound after market was flooded by supply and prices plunged in 2014.

Copper forecasts have been upgraded to $2.50 per pound in 2017 and $2.65 per pound in 2018, due to a combination of production loss, continued supply uncertainty and potential for stronger Chinese demand.

Aluminium prices are forecast to average $0.85 per pound in 2017 and 2018 as Chinese “blue sky” policies could remove substantial amounts of supply off the market, flipping balances to moderate deficit in 2017.

Zinc continues to show strongest fundamentals with prices forecast to average $1.35 per pound in 2017 and $1.55 per pond in 2018.

After Philippines’ President Duterte raised the possibility of banning all domestic mining activity, nickel prices are now forecast to average $5.00 per pound in 2017 and $5.50 per pound in 2018.

Gold prices are likely to average $1200 per ounce in 2017 and $1250 per ounce in 2018.

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